Economic Rationale for Calculating Enterprise Costs using the "Direct-
Costing" System
NASRULLAYEVA GUNASH, MEHRIBAN MAGERRAMOVA, MEHRIBAN YUSIFOVA,
SEVINC MAGERRAMOVA, RAHIMOVA SAMAYA
Azerbaijan State University of Economics (UNEC),
AZERBAIJAN
Abstract: - In the article, we have prepared a practical recommendation for calculating the cost of bakery products
based on the distribution of additional costs, taking into account the marginal revenue, assortment optimization,
and field characteristics, which affect the growth of income and economic growth as a whole, using the "direct-
costing" alternative option of the enterprise in the field of costs management. It is a normative method for
calculating the production costs of the "Cost-standard" system and their calculation. It includes methods of
determining the rate of consumption of production resources and calculating the normative cost of the product.
Key-Words: - direct costing, enterprise costs, cost price, regression analysis, marginal revenue.
Received: May 29, 2022. Revised: August 27, 2023. Accepted: October 2, 2023. Available online: October 30, 2023.
1 Introduction
It is clear from the activity of bakery enterprises that
the true indicator of the cost value should be
calculated only from the point of view of its
economic essence, which arises from the
requirement of managing this enterprise in a
complex market environment. To this end, a
comprehensive research project needed to be
implemented to assess the main prospects for
implementing new SCM practices, [1].
Let's clarify the possibilities of applying the "direct-
costing" system to enterprises of the baking
industry.
Making "cost-standard" management decisions
allows the manager to strategically evaluate the
value of the produced product and the forecasted
income, to conduct reports on responsibility centers,
[2]. We have conducted the study of the "direct-
costing" system, i.e., the incomplete costing system,
in two directions (Figure 1).
The modern interpretation of the "direct-
costing" system is to divide production costs into
fixed and variable costs depending on the change in
product volume. Fixed costs are not included in the
cost of a single product during calculation.
Fig. 1: Directions of face value
Source: [7]
This clarifies the whole sequence of how the value
of the rings in the chain arises and increases, as well
as the question of the creation of value added, the
exact definition of value-added as the product
passes from one ring to another, and how to become
a constant quantity, [3].
The "Direct-costing" system is used to determine
profitable or unprofitable production depending on
the volume of production, to calculate the critical
point of product production, to forecast the cost, as
well as to calculate various costs taking into account
the volume of production and to determine the more
profitable variety of the product, the formation of
•initial conditions for the use of "direct
costing" in the country's economy;
1
•methodological rules and reports to prove
the possibilities and expediency of using
"direct-costing" in the example of the
baking industry;
2
WSEAS TRANSACTIONS on COMPUTER RESEARCH
DOI: 10.37394/232018.2024.12.9
Nasrullayeva Gunash, Mehriban Magerramova,
Mehriban Yusifova, Sevinc Magerramova,
Rahimova Samaya
E-ISSN: 2415-1521
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the cost value, the produced product allows to
optimize the range, [4].
With this, opportunities are created for the
successful solution of strategic management issues
of the enterprise.
2 Summary of References
The theoretical substantiation of this system dates
back to the 18th century. As such, A.M.
Saigidmagomedov proposed to attribute the main
costs to its separate phases, and the additional costs
- directly to the account of the result during this
period, [5]. However, in the works of other authors,
the main signs of the division into fixed and variable
costs were not shown.
V.F. Pali shows that this sign was defined by Dc.
Clerk. It refers amortization of fixed capital,
maintenance of administrative and technical staff to
fixed costs, and costs of equipment adjustment to
the sum of free capital income, [5].
Variable costs include costs related to the
operation of raw materials and materials, electricity,
labor, and equipment, which vary depending on the
volume of other production, [6].
As market relations developed, "direct costing"
was gradually introduced in bakery enterprises of
Azerbaijan.
The increase in competition between these
separate commodity producers, the struggle for the
sales market, and the search for a new segment in
the market are related to the increase in costs
incurred in the adoption and advertising of a new
product type, and in market research.
For example, S.A.Stukov refers to the advantage
of the "direct-costing" system as follows: "Limiting
the cost of the product only to variable costs allows
to simplify normalization, planning, accounting and
control of sharply reduced cost items: the cost is
"more understandable", and other costs - well
controlled, [7].
3 Analysis and Assessment
Many economists object to the use of "direct
costing". They explain this by the fact that it is
unreasonable to exclude fixed costs from the cost
price because those costs are directly involved in the
production process of the product, [8]
In addition, it is not correct to determine the full
cost of the product using "direct costing".
In our opinion, these objections cannot be an
argument for the application of the "direct-costing"
system, and the full cost of the product calculated
through it performs its function.
One of the most important conditions during the
organization of cost accounting with the "direct-
costing" system is the correct allocation of these
costs to fixed and variable costs. The problem here
is that the same type of expenses can be allocated to
different types for different businesses, [9].
However, to overcome this difficulty, standard
programs of correlation analysis and pair regression
should be used to determine the relationship
between costs and production volume.
In general, the issue of traditional optimization of
the range and the implementation of the "direct
costing" system are given in Table 1.
If the regression analysis gives the dependence
between the price of any cost item and the volume
of production that is close to a straight line, then if
the correlation coefficient is close to 1, variable
costs will prevail in the composition of production
costs.
If the correlation coefficient approaches zero,
then production costs have a weak effect on output
and can be called fixed costs, [10].
As can be seen from the table, the fundamental
difference in both problems is that each of them has
a maximum of half.
Despite the increase in the number of tools
stimulating the economic activity of market
participants, the problem of confidence has not only
lost its actuality but has also begun to have an
increasing impact on economic development.
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DOI: 10.37394/232018.2024.12.9
Nasrullayeva Gunash, Mehriban Magerramova,
Mehriban Yusifova, Sevinc Magerramova,
Rahimova Samaya
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Table 1. The issue of traditional optimization of the variety and the introduction of the "Direct-costing" system
Setting the issue of optimizing the range in consideration of the full
cost
n
Max.F JcXc – total income;
c=1
icxc bi – limitation on the raw material;
Xic 0
Jc – c income per unit of the data of the type ;
Xc– production volume of this type of product;
i – c the rate of income of the type of product, I type of raw material;
bi - volume of I-type raw material.
In the first case, it is total revenue, and in the second
case, it is total marginal revenue, whose price is
found as the difference between sales revenue and
variable costs, [11].
Table 2. Initial data for regression analysis
Months
Release of
product
Cost models mln. [AZN]
Inclusion of
raw
materials
and
materials
TZP
Fuel and
electricit
y for
technolog
ical
requirem
ents
Wages of
production
workers
Social
allocatio
ns
General
productio
n costs
General
economi
c
expense
Unplanned
costs
January
1722,8
3245,1
69,0
210,99
54,0
330,8
837,62
73,23
February
1815,7
3405,85
73,19
218,0
54,09
335,48
846,99
73,9
March
1863,4
3495,37
72,87
216,56
57,08
357,7
838,7
70,8
April
1972,5
3683,29
75,85
2223,09
55,15
331,79
840,32
77,77
May
1946,7
3637,52
75,13
222,24
57,13
333,68
849,35
76,21
June
1828,9
3433,74
71,40
213,41
53,06
334,22
838,18
75,36
July
1707,5
3216,68
68,63
207,48
53,99
331,74
850,38
71,28
August
1644,3
3105,75
66,89
206,43
51,95
331,49
837,44
73,69
September
1689,3
3184,99
568,12
210,89
52,17
330,64
836,12
75,11
October
1717,4
3238,29
68,88
206,80
54,99
354,78
836,53
77,26
November
1712,2
3225,18
68,74
214,64
55,0
333,76
840,46
76,16
December
1782,9
3352,09
70,67
209,92
56,72
334,81
838,50
70,21
It can be seen from Table 1 that the costs of raw
materials, fuel, and electricity are mainly variable:
the average monthly share of variable costs is
93.64% and 69.36% respectively (Table 1).
Similarly, the Initial data for regression analysis are
presented in Table 2.
Expenses allocated to employee salaries and
social deductions are attributed to variable expenses
and are 40.94% and 34.4%, respectively. The types
of variable costs are presented in Figure 2.
Fig. 2: Types of variable costs.
Source: [12]
Traditionally, these types of costs were
considered entirely variable, and their cost was
attributed entirely to the cost of the finished product.
Variable
costs
Salary Social allocations
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Nasrullayeva Gunash, Mehriban Magerramova,
Mehriban Yusifova, Sevinc Magerramova,
Rahimova Samaya
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Table 3. Results of regressive analysis
Article of costs
The
average
price of
given costs
The pair correlation
equation
Pair
correlation
coefficient
Share of
fixed costs
Share of
variable
costs
1
2
3
4
5
6
Inclusion of raw materials
and materials TZP
3352,03
Y=1,7597X + 213,31
0,999
6,36
93,64
Fuel and electricity for
technological
requirements
70,77
Y= 0,0275X +21,686
0,9848
30,64
69,36
Salaries of production
workers
213,37
Y= 0,0489X+126,018
0,895
59,06
40,94
Social demand allocation
54,61
Y=0,0105X +35,82
0,6237
65,69
34,41
General production costs
74,25
Y=0,009656X+319,519
0,1084
9994,88
5,12
General household costs
336,74
Y=0,0148X+814,059
0,3257
96,85
3,15
Commercial costs
84,25
Y= 0,005886X+63,75
0,2436
85,86
14,14
Source: author’s work.
Such a semi-fixed-semi-variable nature of the
salary is explained by the fact that there were no
changes in the staff table of the enterprise during the
considered period [one year], and therefore the
payment of the salary remained practically constant
every month.
If we look at the change of these costs for a
longer period [3-4 years], it is clear that then we
would get another option, that is, we would see
more clearly that the costs are variable.
The analysis shows that production, farm, and
commercial costs as a whole are fixed (94.88%,
96.85%, and 85.86% for fixed costs respectively).
There is also a certain share of variable costs. The
biggest price is in unrealized costs -14.14%.
This can be explained by the fact that the
additional increase in output over the period under
review led to a proportional increase in the cost of
delivering it.
This research realizes that people positive impact on
the lives of the inhabitants of the country, [12].
4 Suggestion
We propose the following criteria to characterize the
demand in bakeries.
According to the frequency coefficient of orders:
𝐾𝑠.𝑡. =
𝑡ℎ𝑒 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑑𝑎𝑦𝑠 𝑤ℎ𝑒𝑛 𝑜𝑟𝑑𝑒𝑟𝑠 𝑤𝑒𝑟𝑒 𝑝𝑙𝑎𝑐𝑒𝑑
𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑤𝑜𝑟𝑘𝑓𝑜𝑟𝑐𝑒𝑠 𝑑𝑢𝑟𝑖
牡
𝑔 𝑡ℎ𝑒 𝑝𝑒𝑟𝑖𝑜𝑑 𝑢𝑛𝑑𝑒𝑟 𝑟𝑒𝑣𝑖𝑒𝑤
(1)
According to the number of orders during the
considered period, the given values of the criteria
for each enterprise will be individual. According to
them, the nature of the demand can be conditionally
divided into the following (Figure 3).
Fig. 3: Criteria for enterprise
Source: [7]
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Nasrullayeva Gunash, Mehriban Magerramova,
Mehriban Yusifova, Sevinc Magerramova,
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The distribution provided is conditional.
However, when grouping is carried out in a separate
enterprise, more precise limits can be adopted
according to the type of requirements.
In our case, for a very low, moderate product
demand, we recommend placing the actual release
by last year's volume, and for a high-demand
product, we recommend including limit by capacity.
5 Conclusion
Conducted studies show that the optimal
programming calculated by the "direct-costing"
system gives 7.43% more income than the
calculation by the traditional method.
The advantage of the "direct-costing" system is
that it not only defines the product strategy more
specifically but also allows one to determine the
corresponding costs and the indicated income, [13].
With its help, we can get information about the
fixed costs that the enterprise has to pay even if it
does not produce anything. Both problems were
solved with the help of the simplex method of linear
programming.
Thus, by applying the "direct-costing" system,
the enterprise will know below which level the
income cannot fall to avoid losses.
Besides these, the regression analysis will allow
us to know the trend of the change in the cost value
and its elements quite accurately.
The production program calculated by the
"direct-costing" method, as a rule, in natural terms,
gives a few percent more income in the low-volume
release of the product.
Thus, there is a reason to consider this method
more accurate, as its application allows to
elimination of the variable and different effects of
the invested money from the fixed costs that appear
during the most traditional distribution of costs.
The above-mentioned method of optimizing the
production program can be applied to both small
bakeries and large bakeries, [14].
In small bakeries, the range is not very large,
and the cost forecasting reports will not be very
difficult therefore the volume of output will be easy
to manage.
A variant approach to cost formation is also
important for large-scale bakery enterprises, where
the number of assortment groups is quite large and
requires regular assortment changes in accordance
with changing market conditions.
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DOI: 10.37394/232018.2024.12.9
Nasrullayeva Gunash, Mehriban Magerramova,
Mehriban Yusifova, Sevinc Magerramova,
Rahimova Samaya
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Contribution of Individual Authors to the
Creation of a Scientific Article (Ghostwriting
Policy)
- Nasrullayeva Gunash and Mehriban Magerramova
carried out the simulation and the optimization,
Resources.
- Mehriban Yusifova has organized and executed
the experiments of Methodology.
- Rahimova Samaya has organized and executed the
experiments of Validation.
- Sevinc Magerramova was responsible for the
Statistics.
Sources of Funding for Research Presented in a
Scientific Article or Scientific Article Itself
No funding was received for conducting this study.
Conflict of Interest
The authors have no conflict of interest to declare.
Creative Commons Attribution License 4.0
(Attribution 4.0 International, CC BY 4.0)
This article is published under the terms of the
Creative Commons Attribution License 4.0
https://creativecommons.org/licenses/by/4.0/deed.en
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WSEAS TRANSACTIONS on COMPUTER RESEARCH
DOI: 10.37394/232018.2024.12.9
Nasrullayeva Gunash, Mehriban Magerramova,
Mehriban Yusifova, Sevinc Magerramova,
Rahimova Samaya
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